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Did Markets Soar Ahead of Fundamentals? Quality ETFs to Play

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After two-months of stupendous rally, Wall Street fell apart on Jun 11 as another 1.542 million Americans claimed unemployment benefits amid the COVID-19 crisis, signs of rising coronavirus cases with easing lockdowns are visible and the Fed stated its cautious outlook for the economy. Key U.S. indexes fell in the range of 5% to 6.9% on Jun 11.

Wall Street ripped higher lately on the unprecedented U.S. central bank and government stimulus. Many have hoped for a V-shaped recovery, especially after a surprisingly upbeat May jobs report and some better-than-expected economic data points.

However, in the latest policy meeting, Federal Reserve Chair Jerome Powell poured some cold water on the extra-euphoric Wall Street bulls, saying “millions” of people will not able to resume work for some time because of the aftershocks to businesses from the COVID-19 crisis.

The Fed now expects the U.S. unemployment rate to hit 9.3% this year, dropping to 6.5% in 2021 and declining further to 5.5% in 2022. The unemployment rate in May dropped to 13.3% from 14.7% in April. Before the pandemic, the U.S. unemployment rate was hovering near the 50-year lows of around 3.6%.

The Fed sees American GDP falling by 6.5% in 2020 before rising by 5.0% in 2021 and 3.5% in 2022. The projections and Fed comments hint that the coronavirus-led economic crisis is far from over. In short, there is a “disconnect between Main Street and Wall Street,” per analysts.

Moreover, coronavirus cases have been rising in key states such as Texas, California and Arizona. Texas alone reported 2,504 new infections on Jun 10, marking the highest one-day total since the pandemic started.

Why You Should Focus on High-Quality ETFs

Many academic studies have demonstrated that high-quality companies – as determined by factors such as high earnings quality and low leverage – consistently deliver better risk adjusted returnsthan the broader market over the long term.

With rising uncertainty and a global recessionary environment, investors may consider parking money into quality ETF. These ETFs hold stocks with excellent earnings records, strong balance sheets and high return on equity.  Such stocks normally stay steady during market swings.

CFRA’s Sam Stovall said the market has been highly overbought and the sell-off on Thursday could mark the beginning of a bigger pullback. Stovall said stocks could decline 5% to 10% from the Jun 8 peak. So, investors may consider investing in these high-quality ETFs to fight what some believe is the start of a bigger decline in Wall Street.

iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)

The fund gives exposure to large- and mid-cap U.S. stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage). It charges 15 bps in fees.

SPDR MSCI USA StrategicFactors ETF (QUS - Free Report)

The underlying MSCI USA Factor Mix A-Series Index measures the equity market performance of large and mid-cap companies across the U.S. equity market. It aims to represent the performance of a combination of three factors: value, quality, and low volatility. It also charges 15 bps in fees.

VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report)

The fund follows an index which tracks the overall performance of the “attractively priced companies with sustainable competitive advantages.” As a result, this fund also calls for quality exposure. The fund charges 48 bps in fees (read: Can Buffett-Style Investing Succeed Today? Stocks & ETFs to Consider).

FlexShares Quality Dividend ETF (QDF - Free Report)

The underlying Northern Trust Quality Dividend Index is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is similar to that of the Northern Trust 1250 Index and the Index are selected based on expected dividend payment and fundamental factors. It charges 37 bps in fees and yields 3.48% annually.

Invesco SP 500 Quality ETF (SPHQ - Free Report)

The underlying S&P 500 Quality Index tracks the performance of stocks in the S&P 500 Index that have the highest quality score, which is calculated based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio. The fund charges 15 bps in fees.

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